The Icahn Effect: Is Apple the Next Netflix?

CHARLOTTE, N.C. (Stockpickr) -- On Aug. 13, the share price of Apple (AAPL) had been hammering relentlessly for two hours at the immovable $475 resistance level when, at 2:21 p.m.,Carl Icahn tweeted: "We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come."

What happened next -- the instantaneous result of this tweet -- is very dramatically represented in the chart below and is being referred to by many as the "Icahn Effect." People like to point at the past year's amazing run-up of Netflix's ( NFLX) stock price as a prime example of this so-called Icahn Effect. One of the most common questions people are now asking me is: Will Apple's stock price soar the way Netflix ran up after Icahn announced a similar large investment last year?

To best answer that question, we should look at the situation from several different angles, and come up with several possible scenarios, based on several different metrics.

For example: After Icahn announced his big investment in NFLX, the stock soared in nine months to trade at a forward P/E of 80. If Apple's stock rises to trade at a forward P/E of 80, the share-price of AAPL will be $3,400. Not gonna happen.

After Icahn announced his big investment in NFLX, the stock price quadrupled in nine months. If Apple's stock experiences a similar quadrupling, in nine months AAPL will be trading at $1,900. I don't think so.

After Icahn announced his big investment in NFLX, the stock rose within nine months to trade at a price-to-book-value ratio of 15. A similar rise for Apple would propel its stock to $2000. Highly unlikely.

After Icahn announced his big investment in NFLX, the stock jumped within nine months to a price-to-sales ratio of 4. If AAPL jumps to a price-to-sales ratio of 4, it will be trading at $750. Hmmm. Maybe.

Icahn says that if Apple uses the cash in its coffers to increase the size of its planned stock buyback, that action alone will cause AAPL to rise to $625 per share. Sounds reasonable, as leveraged cash is certainly worth more than idle cash.

While Icahn's announcement certainly served as an effective catalyst to propel AAPL upward through the stiff $475 resistance level, the stock had already been in the midst of a strong month-long upswing.

What had been happening prior to that, for months, was that AAPL had stopped trading like a technology stock and started trading instead like a retailer stock. This is perfectly understandable, in light of the fact that Apple hasn't had any major new product launches since the iPad three years ago -- and there have even been no minor product launches since last year. So Apple had for nearly a year settled into being merely a retailer of existing products, and its stock-price was punished, dropping to trade for months in a zone at or below a P/E of 10.

That is all expected to end soon, with a rumored Sept. 10 media event to launch its next-generation iPhone 5s and a cheaper iPhone 5c to capture market share in lower price-ranges.

Also expected to be released soon are new versions of Apple's iOS and Mac OS X operating systems and a bold redesign of its Mac Pro desktop computer. Long-shot products thought to be in development include an iWatch wearable computer and an Apple television.

I have closely watched and frequently traded AAPL for years. Short-term, I expect AAPL to be an excellent trading stock. From an investment perspective, I suspect it would be wise to initiate a small position here at the $500 level. Based on past experience and the charts, I would expect AAPL to pull back to re-test the $489-level and perhaps even the $475level, but there is of course no guarantee that will happen.

Will there be over the long-term an Icahn Effect that by itself will propel Apple's stock to astronomical levels? That remains to be seen.

I am inclined to answer "no" and declare instead that the fate of Apple's stock remains in the company's own hands, in Apple's power to revive and energize the creative will that formerly enabled it to change the world. That creative will needs to be encouraged, gathered, guided, released and channeled from the top -- which makes it all the more interesting that two months ago CEO Tim Cook declared that his compensation should be closely tied to the performance of Apple's stock.

All things considered, I believe that Icahn's big investment in AAPL mostly serves as a very visible acknowledgment that Apple is moving onwards and upwards.

Trader Ben Brinneman, featured on MarketWatch
, Bloomberg
and Reuters
, resides in Charlotte, N.C., and is the owner of C Squared Trading. Brinneman started his career trading bonds for U.S. Bancorp and was an analyst for a wealth management firm. Brinneman and his team at C Squared Trading have taught hundreds in a one-on-one mentorship setting via Skype or live in Charlotte.

You can follow some of their free trades and tips on Twitter at @csquaredtrading.